Unmade in India

The manufacturing bottleneck is created by restrictive labour laws, skills mismatch (REUTERS)

January 25, 2014 9:19 am

The ambitious National Manufacturing Policy (NMP) seeks to make India a global leader in manufacturing. Unveiled in 2011, the NMP envisions that the share of manufacturing will increase from the current 16 per cent to 25 per cent of the GDP by 2022, besides creating 100 million new jobs. The policy emphasises the establishment of Chinese-style mega-industrial corridors, national investment and manufacturing zones and connecting major commercial centres, like the seven industrial cities being planned along the Delhi-Mumbai freight corridor.

It is hoped that these industrial clusters will promote small and medium enterprises (SMEs) by addressing coordination problems and leveraging economies of scale — facilitate common forward and backward linkages, lower fixed costs, simplify regulatory clearances, provide policy certainty, etc. However, we need to remember that much the same concept has been an integral part of India’s industrial policy for nearly five decades, with limited success. The NMP may therefore have to be complemented with economy-wide reforms that seek to relax several other binding structural constraints.

In this context, the work of Harvard University Professor Ricardo Hausmann helps shine more light on India’s manufacturing challenge. In brief, a country’s capabilities are encapsulated in the products it makes. Countries grow not by making more of same products, but by moving up the manufacturing value-chain, from their current products to other, usually more complex products. But this structural transformation is easier between closely related product categories, or where there are complementarities in the required capabilities. In simple terms, a region making air-coolers will find it easier to move into making other consumer electronics than one involved in food processing.

Hausmann’s team has constructed a “product space”, which is a network of relatedness among all possible products in the world. A country’s product space — while reflecting the products made by it and how they relate to each other — also represents the opportunities available to move up the value-chain. Based on a comprehensive cross-national time-series database of all products exported by countries, they find that India’s current product diversity endows it with the best opportunities for structural transformation among all countries. But an analysis of changes in India’s export basket in 1998-2010 reveals that far from upgrading to more complex products, as peers like China have done, Indian manufacturing has been stagnating.

The signs are everywhere. Manufacturing’s share in the GDP has remained stationary at 15-16 per cent for more than three decades now, far lower than the 25-35 per cent that characterises the East Asian economies. The sector’s share in employment had declined to 10.5 per cent by 2009-10, eclipsed by construction as the second-largest employer after agriculture. A Planning Commission report reveals that half of the 48 million-net non-agriculture jobs generated in 2004-12 were in construction, whereas manufacturing contributed just 5 million. A McKinsey study claims that more than half continued…